Calgary Home Price Growth Slowing But Will Prices Fall?

With double digit price increases behind us, will we soon be faced with declining home values?

The City of Calgary benchmark price peaked at 11.19% annual growth in June but slowed to 8.52% by November.  Similarly, the most recent readings from both the New Housing Price Index and Teranet–National Bank House Price Index have shown gains decelerating from levels seen earlier in the year. (See chart below)

Calgary YOY Price Growth

Calgary YOY Price Growth

Eyes are now on oil and the potential fallout for Calgary’s economy if these low ~$70/barrel levels persist.

CIBC economist Benjamin Tal said Calgary had a significant home-price correction during the recession, and has now “overshot” a bit in its recovery.  He said the key factor for Calgary is the level of oil prices. If they are high, the economy prospers and people can afford more expensive homes. “It’s a different cycle” from the rest of the country, Mr. Tal said. (Source)

It’s much too soon to make an assessment, but so far the oilpatch problems haven’t translated into overall job losses.  Employment in the Calgary area rose by 4,700 people, or 0.6% between October and November,  and the unemployment rate fell to 4.4%. (Source)

Robert Kavcic, an economist with BMO, notes migration flows into Alberta could be “cut in half” in the next year or two because of plunge in oil prices.  In turn, this would result in Calgary home  “prices softening, not dramatically crashing.” (Source)

If net migration is cut in half, what will that mean for the new home market? Remember, CMHC is expecting new home starts to reach 17,200 units by year end, surpassing the record of 17,046 starts in 2006. (Source)

The concern would be of the market being swamped with new homes with fewer buyers in play, similar to what we experienced towards the end of the last boom.

According to CMHC’s October data, there was inventory of 15,604 under construction which is the highest level at the end of any month since at least 1990.  Here’s the breakdown:

  • Single: 3,718
  • Semi-detached: 1,068
  • Row: 2,237
  • Apartment: 8,581

Source: CMHC

The new home construction landscape differs to the one eight years ago in several key ways.   Let’s look at the two segments which make up the largest portion of under construction units: single-detached and apartment.

Single-Detached New Construction

The 3,718 single-detached homes make up only 24% of the under construction inventory compared to 47% back in October 2006.  There are fewer single homes in the pipeline and 46% less units that are completed but not yet purchased, a comparatively better foundation with which to withstand a cooling market.

Source: CMHC

Single-detached inventory under construction.  Source: CMHC

Source: CMHC

Single-detached completed and unabsorbed. Source: CMHC

Apartment New Construction

Making up 55% of the inventory with 8,851 units under construction is the apartment segment.  Levels are elevated but still below historical highs.

Source: CMHC

Source: CMHC

A key difference between now and then is that 16% of the apartment units under construction (1,329/8,581) are slated for the rental market.

Apartments under construction marked for rental. Source: CMHC

Apartments under construction marked for rental. Source: CMHC

There was only 1 completed unabsorbed unit by the end of October, but by the very nature of apartments, inventory can spike suddenly when a project is completed.

There was only 1 unabsorbed unit at the end of October (Source: CMHC)

There was only 1 unabsorbed unit at the end of October (Source: CMHC)

Unlike single-detached homes that can be occupied just months after construction, Richard Goatcher, economist analyst with CHBA, notes that the “multi-family starts in ’14 will take awhile to enter inventory – especially the hi-rise apartments.”

Interesting times as we look forward to the year ahead.   Will oil prices remain depressed resulting in a cascading effect of job losses, decreased migration and an oversupply of homes?  Are interest rates finally going to increase in 2015 thus degrading affordability?

What are your thoughts?


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